To no-one in particular's surprise, SAP has announced the much anticipated changes in its post 2025 ERP product line maintenance policy. The timing of the announcement is 'pitch perfect,' coming as it does the week after the company announced its Q4 FY2019 results and in a quarter that is usually regarded as a 'graveyard shift' by most enterprise sales people. What's happening?
- A commitment for maintenance for S/4HANA through to 2040
- An extension of the '2025' deadline for maintenance cut off for SAP ERP 6.0, SAP Customer Relationship Management 7.0, SAP Supply Chain Management 7.0, and SAP Supplier Relationship Management 7.0 applications and SAP Business Suite powered by SAP HANA
- Beyond 2027, customers in transition will have the option to purchase extended maintenance through to the end of 2030 at a premium of two percent above existing maintenance prices of 22%.
- Customers who choose not to make the S/4 transition "will automatically be transferred to the customer-specific maintenance model. This includes problem solving for known issues at unchanged fees."
Included in the announcement, Geoff Scott CEO ASUG is quoted as saying:
This announcement is not a signal to slow down. This is now the time to commence plans and move forward so that SAP customers can harness business value from what is the most significant technology change in SAP’s recent history.
Andreas Oczko, the DSAG Board Member for Operations/Service & Support said in a separate announcement that:
The maintenance commitments for S/4HANA through at least 2040 and for Business Suite 7 through the end of 2030 are not a carte blanche for companies to keep waiting. Instead, it is a sign they should put their recent reluctance to one side and start tackling digital transformation.
Let's break this down.
The terms under which SAP is offering ongoing support are well understood by SAP customers so there is no surprise there. In any deal, there will be a degree of horse trading but the economic impact on those customers will to start the road to S/4 should not be material. Why?
A typical S/4 deal comprises a bundle of offerings that looks something like this:
- HANA Enterprise
- Master Data Governance
- SAP Analytics Cloud
- SAP Cloud Platform
The precise shape of this varies from customer to customer but in essence, the S/4 component comes in at fractional cost. Smart negotiators will ensure that associated maintenance is equally fractional.
This is where things get decidedly tricky so follow along as I walk through what we believe will happen.
The implication from the SAP announcement is that they anticipate the majority (whatever that means) of customers will have bought into S/4 and be on the road to S/4. While that is possible, SAP would require incredibly favorable circumstances in order to achieve that outcome. SAP might draw comfort from ASUG readers who recently saw the results of a survey suggesting that 0% - that is ZERO have no plans of moving to S/4. At the time, Geoff Scott was very clear in his assessment that no plans is not the same as will move. The critical point is:
Keep in mind, that data doesn’t mean they all will decide down the road to adopt SAP S/4HANA—just that, at this point in time, they are actively making assessments for their next ERP moves and that they have not ruled SAP S/4HANA out entirely.
We have seen and modeled a variety of outcomes and our view is that if SAP gets 75% of its customers across the S/4 line by 2030 then that will be a significant achievement. Why is that? Read on.
Market capacity to invest
SAP has consistently talked about the S/4 sales momentum but again, the numbers are difficult to make stack up. Here's how it goes:
Current estimates of the total SAP ERP universe are in the range 40-42,000 customers of which 13,800 have bought S/4 per SAP's results. Out of that number, something in the range 30-40% are net new in the conventional sense. That means roughly 27,000 customers have yet to buy and 32,000 have yet to start implementing or go live - give or take.
Can SAP get 27,000 customers across the buy line by 2027? In order to achieve that, SAP has to, on average, sell around 3,800 systems a year from now. Is that possible? We don't think so. If anything, we think that despite the exhortations of both SAP and its user groups, as many as 25% will pass 2030 with no decision and may not make the transition at all.
More important, can the SAP ecosystem get customers who have bought into S/4 across the implementation/go live line. This is where things get even trickier.
Market capacity to implement
We believe the global market capacity to complete projects that qualify as S/4 go live is no more than 2,500 per annum. We believe that comprises around 1,000 pa among the Big 4 and the remainder among the Tier 2 SIs. The fact that SAP put out 173 go lives in North America in 2019 tells you all you need to know in that regard.
Again, let's do a bit of math. It doesn't matter whether my estimates for sales momentum and total SAP ERP universe are incorrect, the capacity to get customers live is inadequate to meet any of the deadlines we see today. That is, unless the SI community can ramp bench strength with experienced consultants by a factor of x2, it is very difficult to see how this is achievable.
I'd go further. If you believe the universe of SAP customers is higher than current estimates and that SAP can get more customers over the buy line than I've suggested then the timeline problem gets worse rather than better. The only way this really works is if SAP can get customers to move directly to a multi-tenant environment where implementations are simpler and faster than the usual 18 months type of project you'd expect to see.
But here's the kicker - we don't know of any critical mass of customers who are taking this route. Instead, they are looking at what amounts to a shift in data center to the hyperscalers on single tenant private cloud instances. That means customers will be faced with a 'traditional' project - on the one hand more convenient and familiar but potentially more difficult and risky to achieve in a short period of time.
We know that SAP, along with Accenture are aggressively ramping resources. On the earnings call, SAP made reference to its own efforts and of its closer partnership with Accenture but what we don't yet know are the numbers involved. Even so, we continue to find it difficult to come up with a convincing model that aligns sales and projected sales to go-live implementation values.
I won't bore you with the detailed math on this but I have sense tested my model and no one is saying that it is insane.
Moving on. What other issues are there?
Versioning, tooling etc
In another ASUG article, Ron Gilson, CIO at Johnsonville talked about how his 1610 project had to be abandoned because his company needed business critical third party applications that were not certified in time:
Johnsonville had to abandon an upgrade from 1610 to 1809 due to lack of certification for critical third-party solutions. In October 2019 we received final certification on our third-party solutions for 1809—more than a year after the initial release of 1809 and a month after the release of 1909. In December 2019, Johnsonville successfully upgraded our production instance to the 1809 release.
In essence Gilson is saying that even in the most ideal of circumstances, his firm anticipates being on an n-1 S/4 release. That in turn means that it is more difficult to consume innovations in the other product areas SAP would like its customers to invest in.
There are many reasons for this, one of which is third party incurred certification cost. But more important, partners don't have the insight into upcoming releases and roadmaps to the point where they can accelerate their own development. In some cases, third party partners are not moving to S/4 until they see a critical mass of existing customers willing to do the same. The investment is not worth their while. That then means customers have to search out alternatives at a time when their project plans for S/4 are active, and therefore at risk. Here is how the ASUG research into the topic characterized the current situation:
40% of customers expect partners to have solutions certified within 60 days of the general availability (GA) of each release. Yet, only 22% of partners expect to be certified within that same time period. The most concerning result of the survey is that nearly 20% of the partners are expecting it may take up to a year or more after GA to certify. Additionally, some partners do not plan on certifying for every release.
One answer is improved tooling and automation. SAP says that it has tooling in place to act as accelerators but customers are not wholly convinced. Large SIs are working hard on these areas, as are a clutch of SAP partners but it remains incumbent upon SAP to make life as easy as possible for all parties and that's not quite there.
I said earlier on that as many as 25% of all current SAP customers might choose to abandon SAP altogether or simply put their R/3-ECC landscapes on hold, preferring instead to innovate around the edges with third party solutions.
- All those products in a typical S/4 bundle? Excluding S/4 and HANA Enterprise - all are candidates for replacement by third party solutions that are in market today.
- Customers who fear being 'wallet fracked' will be naturally hesitant.
- 3PM vendors can offer R/3-ECC customers breathing and budget space to innovate without making a transition
- There is a long tail of small R/3-ECC customers who can find alternative solutions that are equally feature rich elsewhere.
None of what I am saying today should take away from SAP's timely announcement. As co-CEO Christian Klein continues to say - this is the year SAP has to deliver on its promise to customers and I'd judge this to be the first step. But SAP should not confuse sales with adoption and go-live. These are very different metrics for very different audiences.
The challenges for SAP are clear:
- Assure customer that making the investment decision to go with S/4 demonstrates clear value for the next 20 years. It's not enough to point to past success.
- Solve the tooling problems - preferably by aligning more closely with partners who are in market rather than relying solely on its own tooling.
- Solve the certification issue through greater partner transparency such that those who are hanging back see value in continued investment and that release cycles are aligned.
- Ensure that certifying consultant on S/4 does not continue the bad practices of the past where taking a multi-choice exam gets a newbie across the line. Customers won't tolerate that.
None of this will happen any time soon and SAP's commitment to rewarding its own people based on customer experience should make a significant positive difference going forward.
Where I disagree with the quoted user groups is on their insistence that early decision making should guide SAP customers. SAP rightly considers its customer base as fiercely loyal but that's not universally true. What's more, the overall tooling and third party app support landscape for S/4 transitions is not sufficiently mature for customers to be confident in project success. There is too long a history of project failure and here I would counsel SAP to keep on top of the SI community to ensure that S/4 projects consistently delight customers. In addition, the business case topic is not far from mind. As Paul Cooper chairman of the UK & Ireland SAP User Group said in an emailed response:
Our member surveys have continued to show that cost and change management are the biggest reasons for organisations not to move to S/4HANA, meaning they need to have a clear business case. With SAP stating that growing numbers of customers globally are moving to S/4HANA, we look forward to continuing to work with SAP to demonstrate more use cases, so our members can make an informed decision about their future roadmap.
Amen brother. Amen.